Irish bank stress tests could drive up bailout costs

AP, DUBLIN

A busker stands outside a branch of the Permanent TSB, the banking unit of Irish Life & Permanent PLC in Dublin, Ireland, on Wednesday.

Photo: Bloomberg

Ireland was to publish stress tests on its four surviving banks yesterday, and analysts expected the results to force all of them to come under majority state control and perhaps even shove the country into an eventual default.

Regulators were to disclose numbers on two banks that are already majority state-owned — Allied Irish Banks and the Educational Building Society — and two others were expected to join that club soon: the Bank of Ireland and Irish Life & Permanent.

The results were widely expected to show that last year’s estimated potential losses for Irish banks — 54 billion euros (US$76 billion) — were far too low. Economists said the new total would likely approach 80 billion euros or more, about half of Ireland’s entire economy.

“The government is trying to remove uncertainty. But if we are going to spend up to 80 billion euros to recapitalize our banks, that’s just too big for us to manage. It will not work,” said Jim Power, chief economist at Friends First, a Dutch-owned insurance company in Ireland. “We need a major European initiative quickly, otherwise the future of the euro is under serious threat.”

Last year, as Ireland found itself unable to fund a deficit ballooning because of the bank bailout bill, the nation was forced to negotiate a 67.5 billion euro bailout credit line from the EU and the IMF.

At the time, that loan was designed to cope with Ireland’s cash needs through 2014, but if the bank rescue costs soar as expected, analysts warn the EU-IMF loans won’t be enough.

The soaring rising bailout bill may leave Ireland with no choice. The estimated 80 billion euros needed to save the banks represents nearly 18,000 euros for every man, woman and child in the Republic of Ireland — or 45,000 euros for every worker paying income tax.

Ireland has mounted two previous rounds of tests to find the bottom of its debt crisis. However, yesterday’s figures would be the first assessing the full potential impact of failing residential mortgages. Hundreds of thousands of Irish are trapped in negative equity and, with unemployment at a 17-year high of 14.7 percent, tens of thousands are at risk of foreclosure.